Fashion Stocks Seek Redemption After Wall Street Fallout
The industry is trying to come back after a tough year that brought some buzzy darlings back down to earth.
Wall Street has always been a roller coaster — but the ups and downs have all become supersized, leaving fashion to barrel into 2023 with more than a little stock market whiplash.
Investors are ceaselessly gauging the prospects of everything, taking in the economy, the consumer, new products, strategy and performance and boiling it down to a single data point — the all-important stock price.
And while ups and downs are expected as individual companies and sectors surge ahead or as the economy cools, something more is going on.
The investment crowd fundamentally reset expectations for the consumer sector in 2022 as e-commerce growth slowed, inflation and interest rates skyrocketed and recession loomed. Last year also had its optical challenges and the quarterly financial reports often paled in comparison with the go-go days of 2021, when the world was first reemerging from COVID-19.
The Dow Jones Industrial Average dropped 8.8 percent in 2022, but fashion fell further and faster.
A WWD study of 104 global apparel, luxury, retail and beauty companies found that only 26 firms in the space beat the Dow last year. (E.l.f. Beauty Inc. led the way, rising 66.5 percent, while middle America department store standby Dillard’s Inc. gained 38.7 percent).
Luxury also held onto its pandemic gains and continued to power through even the economic worries, but 2022 was a year defined by the decliners.
Among those getting hit the hardest were some of the buzziest names of yesteryear that were either new to Wall Street or pushing newer business models that investors are still trying to get their heads around.
Companies losing more than 70 percent of their value last year included resale specialist ThredUp Inc., brand house A.k.a Brands Holding Corp., sneaker-maker to the tech crowd Allbirds, social media-focused beauty company Olaplex Holdings Inc. and direct-to-consumer eyewear pioneer Warby Parker Inc.
That counts as a rude awakening for the great 2021 wave of IPOs and leaves the position of some of the newcomers in doubt.
“Darlings fall quickly and the first step’s a doozy,” said Matthew Katz, managing partner at SSA & Co.
That reflects the flight of investors from the buzzy new idea to the more tried and true business model — and it seems likely that investors will continue to seek out safety.
“We’re in a period of uncertainty,” Katz said. “And some would say it’s become more and more certain that there’s trouble ahead.”
So companies still working on their operations might get caught in the squeeze.
“Where there’s unfinished business, inefficiencies are going to get magnified in a period of slowdown,” Katz said.
Resale platforms, for instance, caught the imagination of investors quickly, but now have to prove themselves as more brands get into the game and the sector evolves.
oshmark Inc., which was valued at more than $7.4 billion after it went public in January 2021, took a $1.2 billion buyout from Naver in October and shares of both The RealReal Inc. and ThredUp are struggling.
Jessica Ramírez, senior research analyst at Jane Hali & Associates, said, “When we look to resale … we were also very surprised how quickly Wall Street adapted to it, which we almost thought didn’t make sense. It usually takes [Wall Street] longer to warm up to some of these ideas.”
Turns out, investors were quick to fall in love in 2021 and quick to move on.
Many companies that had been building in private hands failed to live up to the public market’s big expectations.
Allbrids was another one.
Ramírez said the brand “has a glass ceiling to the excitement it can cause and the stir it can cause.”
The brand is in step, even leading in the sustainability movement, but is still finding its footing.
“There’s a good cause to it, but the shoe isn’t attractive,” Ramírez said. “You need to have good product that’s attractive and have a good story behind that.”
It’s steady businesses and proven models that are winning on Wall Street today, like offpricers Ross Stores Inc. and The TJX Cos. Inc., which have been feasting on the industry’s excess inventory after all the COVID-19 supply chain backups.
“Ross and TJX have really taken advantage of what’s out there to buy and have killed it with their buys,” Ramírez said.
Dick’s Sporting Goods Inc. has also proven its mettle.
“Product has really taken off there — private label and the relationships that they’re building with all their vendors have really increased,” said Ramírez, noting the retailer is also taking advantage of the continuing rise in outdoor activities. “They’re very much in tune and they’re running a pretty good business.”
Dick’s, TJX and Ross not only beat the market, but posted modest stock gains last year — a time when small gains counted as big wins.
Much of the trouble over the past year came from changes in the consumer market that were bigger than any one brand.
Lower-end shoppers started having to choose between fashion and food as prices rose. More consumers went back to stores, slowing e-commerce growth. And Russian president Vladimir Putin’s invasion of Ukraine upended the geopolitical calculus, threatened Europe and prompted many companies to close up shop in the once-promising Russian market.
It might take similarly broad changes to help turn retail back around this year — but in the second half, when comparisons ease again.
John Kernan, an analyst at Cowen, said supply chain cost deflation and more normal inventory levels would drive sentiment in the second half.
“We favor cheap stocks vs. history given the several hundred basis points of gross margin relief from lower ocean container rates and air freight along with the normalization of sector inventory levels and markdowns into the second half,” Kernan said. “Balancing supply chain risk, inventory turn and gross margin is a source of value creation in the sector.”
That is a very back-to-basics path back to Wall Street success after a very rocky year for fashion.
US Destroyer Enters Taiwan Strait As New China FM Argues "World Is Wide Enough" For Both Powers
In the latest sign that Washington is not backing down from its ramped-up military support to the democratic island of Taiwan, and at a moment repeat PLA aircraft incursions have continued their intensity, the US Navy has sailed another destroyer through the Taiwan Strait.
The Navy's 7th Fleet announced Thursday its guided-missile destroyer Chung-Hoon made the passage as part of its commitment to a "free and open Indo-Pacific."
USS Chung-Hoon: US Navy/Wiki Commons
"The Arleigh Burke-class guided-missile destroyer USS Chung-Hoon conducted a routine Taiwan Strait transit Jan. 5 (local time) through waters where high-seas freedoms of navigation and overflight apply in accordance with international law," the Navy's 7th Fleet Public Affairs office announced.
"Chung-Hoon’s transit through the Taiwan Strait demonstrates the United States’ commitment to a free and open Indo-Pacific," the Navy added.
Last month China's Foreign Ministry accused the Pentagon of seeking to create new tensions across the Taiwan Strait with its provocative sail-throughs. At the same time the Chinese military has on multiple occasions in recent months breached the Taiwan Strait median line both in the air and at sea - a pattern which grew only after Nancy Pelosi's provocative August visit to Taipei.
China’s warplane incursions into Taiwan's air defense zone nearly doubled in 2022 compared to the year before as Newsweek reviews of the numbers:
Chinese military aircraft, mostly fighter jets, were detected in the island's air defense identification zone, east of the Taiwan Strait median line, on 1,737 occasions in 2022, up from 972 in the previous 12 months, statistics compiled by U.S.-based analysts Gerald Brown and Ben Lewis revealed.
Meanwhile, as we noted earlier this week, Xi's newly appointed Chinese Foreign Minister Qin Gang is busy attempting a 'softening' and breakthrough in US-China relations.
After taking over the post last Friday, before which he served as the ambassador to the US, he wrote in a new Washington Post op-ed published Wednesday that US-China competition "should not be a zero-sum game," arguing further that "The world is wide enough for China and the US to both develop and prosper."
He asserted that "decoupling serves no one’s interest", but that healthy relations including economic cooperation "will remain an important mission" in his new role as Beijing's top diplomat, but it remains that "Improving relations takes work by both sides," he wrote.
Qin called for 'stability' in relations, ironically just ahead of next week's US-Taiwan official trade delegation talks in defiance of China's condemnations.
As South China Morning Post underscores, the White House is involved: "The trip – a rare visit of US executive branch officials to Taiwan since President Joe Biden took office – will mark the second round of face-to-face talks on the trade initiative and the first held on the island. Washington and Taipei agreed to the talks in June," the report detailed.
>>> Up
* Equinor Raised to Buy at DNB Markets; PT 380 kroner
* Equinor Raised to Buy at DNB Markets; PT 380 kroner
* Heineken Raised to Overweight at Morgan Stanley; PT 103 euros
* Merck KGaA Raised to Overweight at Morgan Stanley; PT 230 euros
* Nestle Raised to Overweight at Morgan Stanley
* Tesla Raised to Buy at Edward Jones
>>> Down
>>> Down
* Danone Cut to Underweight at Morgan Stanley; PT 48 euros
* Diageo Cut to Equal-Weight at Morgan Stanley; PT 3,900 pence
* EasyJet Cut to Neutral at Goldman; PT 450 pence
* JPMorgan Cut to Hold at Deutsche Bank; PT $145
* MorphoSys ADRs Cut to Underweight at Morgan Stanley; PT $3.20
* MorphoSys Cut to Underweight at Morgan Stanley; PT 12.50 euros
* Next Cut to Underperform at Credit Suisse; PT 6,100 pence
* Novartis Cut to Underweight at Morgan Stanley
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>>> Initiation
* Scandinavian Tobacco Cut to Underweight at Barclays
>>> Initiation
* Corre Energy Rated New Buy at Berenberg; PT 3.65 euros
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* Experian Rated New Outperform at Exane; PT 3,200 pence
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* Royal Unibrew Rated New Underweight at Morgan Stanley
* Securitas Rated New Outperform at Exane; PT 115 kronor
>>> Call
* Biogen May Rise Back Into $300s on FDA Nod Friday, RBC Says
>>> Call
* Biogen May Rise Back Into $300s on FDA Nod Friday, RBC Says
* Citi Strategists Raise European Stocks, Cut US to Underweight
* Citigroup, Goldman PTs Cut at Morgan Stanley on Rising Expenses
* EasyJet Downgraded by Goldman on Persistent Cost Pressures
* MS Sees Rotation From ‘Safe-Haven’ Pharma Back Into Growth
* Consumer Staples ‘a Good Place to Be’; Stock Order Changed at MS
* Next Downgraded at CS With Stock Seen Expensive, Limited Upside
* Scandinavian Tobacco Downgraded at Barclays on Weaker US Market
Stocks in Asia and US futures climbed ahead of crucial American jobs data that will help identify the path forward for Federal Reserve monetary tightening. Equities in Japan, Australia and South Korea rose. Shares in China and Hong Kong fluctuated after initially rallying on news reports Chinese officials would remove restrictions on property developer borrowing. Contracts for European futures and those for the S&P 500 advanced after the US index fell 1.2% on Thursday. Treasury 10-year yields retreated slightly after their first gain of the week on Thursday following comments from Fed officials. The dollar steadied and the yen fell to levels not seen in a week, after the Bank of Japan unveiled further unscheduled bond buying to control its yield curve. The broadly positive sentiment precedes US nonfarm payroll data to be released Friday. Estimates peg a decline in new jobs added, indicating a cooling in the labor market that would in turn reduce the need for higher interest rates. However, private payrolls data released Thursday surpassed estimates and a surprise fall in new claims for unemployment benefits underscored a robust jobs market. There are increasing signs of pressure on technology companies, with Samsung Electronics Co. the latest to report on a demand slump resulting in a 69% plunge in operating profit. Shares in the South Korean giant rose as speculation mounted the hit to earnings would prompt the company to reduce capital expenditure. The rise in European stock futures comes ahead of eurozone consumer price index data due later today. Consensus forecasts suggest inflation fell to 9.5% in December from a year earlier, down from 10.1% recorded in November. Oil rose further after a string of declines that wiped nearly 10% from the price of crude. The price of gold increased after retreating Thursday from a six-month high reached earlier in the week. US After Hours WWE +10.5% jumps as Vince McMahon plans his return, will push for strategic alternatives; AEHR +15.5% higher on earnings; USNA -1.1% lower on guidance
Nikkei +0,59% Hang Seng -0,33% CSI +0,29% Shanghai +0,03% Shenzen +0,13%
Eur$ 1,0519 CNH 6,8599 CNY 6,8538 JPY 134,09 GBP 1,1917 CHF 0,9369 RUB 72,0237 TRY 18,7704 WTI$ 74,22 +0,7% Gold 1,839 +8,6% BTC 16,795 ETH 1,247
S&P +0,32% Nasdaq +0,29% EuroStoxx +0,63% FTSE +0,24% Dax +0,58% SMI +0,45%
Macro :
- Citi Strategists Raise European Stocks, Cut US to Underweight
- Goldman’s Bell Expects 2023 To Be a Tough Year for Returns
- Goldman’s Bell Expects 2023 To Be a Tough Year for Returns
- German Regulator ‘Very Optimistic’ About Gas Supply This Winter
Keep an eye on :
Keep an eye on :
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- DANSKE DC : Danske Bank Says US Sentencing Completed as Previously Announced
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- EPIA SS : European Industrials' Lost Russia Sales Eye Capex Bulk-Up Offset
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- MUV2 GY : Munich Re, Swiss Re Increase Rates as Protection Costs Surge 50%
- REN PL : REN Signs EU150m Long-Term Financing Contract With the EIB
- ROG SW : Roche: FDA Grants Priority Review to Glofitamab for Lymphoma
- STAN LN : StanChart Faces Fresh Questions Over Future After Bid Report
- SW FP : Sodexo 1Q Revenue Beats Estimates
- STLA IM : Stellantis May Shut More Plants as Electrification Costs Bite
- SREN SW : Munich Re, Swiss Re Increase Rates as Protection Costs Surge 50%
- UCB BB : UCB Says FDA to Review BLA for Rozanolixizumab With Priority
- DG FP : Vinci Energies Buys Otera; No Terms
Samsung Expects 69% Drop in Profit on Slumping Tech Demand
High inflation and weak economies hit sales of memory chips and smartphones
SEOUL— Samsung Electronics Co. said it expects its fourth-quarter profit to plunge as the firm’s mainstay memory-chip and smartphone businesses face a sharp pullback in demand, showing the extent of the global tech downturn after pandemic highs.
The South Korean tech giant on Friday forecast its operating profit in the quarter ended Dec. 31 to drop by 69% from the prior year to 4.3 trillion won, the rough equivalent of $3.4 billion.
Revenue for the October-December quarter is expected to decline year-over-year by 8.6% to 70 trillion won, the company said.
Samsung’s estimated results were far below market forecasts. Analysts polled by FactSet were, on average, expecting Samsung to report roughly 7.1 trillion won in operating profit and 73.1 trillion won in revenue. The company is scheduled to report its full earnings later this month.
Samsung is considered a bellwether for the tech world. It is a major component supplier to companies such as Apple Inc. and is the world’s top seller of smartphones and TVs and a major player in many other areas of consumer electronics.
Samsung said in an explanatory note that its fourth-quarter profit had fallen because of larger-than-expected order pullbacks and price drops in the memory business, combined with falling sales of smartphones and home appliances. The possibility of a global recession and macroeconomic uncertainties are weighing on its key businesses, it said.
The tech industry at large is going through a prolonged downturn as consumers and companies have pulled back their spending on tech gadgets and electronic goods amid high inflation, rising interest rates and other macroeconomic challenges.
Last year’s worldwide shipments of smartphones and PCs are expected to have dropped by roughly 9% and 12% respectively from the prior year, according to International Data Corp., a tech-market research firm. Chip sales, which move in line with demand for tech goods, have also fallen.
Samsung’s vice chairman and CEO of its consumer-technology division said in a recent interview with The Wall Street Journal that the tech-market downturn would persist, though said he hoped for a potential recovery in the second half of 2023.
This year, worldwide semiconductor sales are expected to decline by 4.1% to roughly $557 billion, according to World Semiconductor Trade Statistics, an industry trade group.
Among the different types of chips, memory chips have taken the biggest price hits, as they are more commoditized and sensitive to supply-demand swings. As a category, memory chips are expected to see the steepest drop in revenue of 17% in 2023, versus a 1.2% decline for logic chips, a 1.6% increase for analog chips and a 3.7% increase for sensor chips, according to WSTS.
Samsung is the world’s largest producer of two major types of memory chips, DRAM, which enable devices to multitask, and NAND flash, which provide devices with storage capacity. The memory business drives most of the company’s income.
In the fourth quarter, prices of Samsung’s DRAM and NAND flash are projected to have both fallen by nearly 30% on a quarterly basis, according to a report last month by Goldman Sachs.
The investment bank forecast Samsung’s semiconductor unit’s operating profit for the October-December quarter to reach 1.5 trillion won, an 83% drop year-over-year. It also projected Samsung’s memory business would record an operating loss starting from the first quarter of this year due to steep losses in the NAND flash business.
Other players in the memory industry have issued grim outlooks. Rival American memory chip maker Micron Technology Inc. said last month that revenue for its latest quarter had dropped by nearly half and that it would curtail its spending. In November, it had announced plans to reduce its memory supply for the current quarter.
The memory-chip sector was in the throes of the most severe supply-demand imbalance in 13 years and profitability would remain challenged through 2023, said Micron Chief Executive Sanjay Mehrotra.
South Korea’s SK Hynix Inc., No. 2 in the memory business, said in October that it would cut its 2023 capital expenditure by more than 50% from the prior year because of deteriorating market conditions.
“I would say the current downturn is very severe for everyone involved in an unprecedented manner,” Noh Jong-won, SK Hynix’s chief marketing officer, said at the time.
Eni calls for south-north energy axis between Europe and Africa
Italian group’s chief pushes for closer collaboration as EU seeks to replace Russian imports
The chief executive of one of Europe’s biggest oil and gas companies has said the EU should look to Africa rather than the US as it seeks to replace Russian energy imports.
Claudio Descalzi, who has run Italy’s Eni since 2014, said closer collaboration with countries in Africa on energy matters offered the potential for a new “south-north axis” connecting the continent’s abundant renewable and fossil fuel resources with the energy-hungry markets of Europe.
“We don’t have energy, they have energy. We have a big industry, they have to develop it . . . There is a strong complementarity,” Descalzi told the Financial Times.
Eni has operated in Africa since 1954, has operations in 14 countries and has continued to invest while several of its US and European rivals have reduced their presence on the continent in favour of other parts of the world.
That footprint meant Africa was the first port of call for Descalzi last year as he sought to replace the 20bn cubic metres of gas that Italy previously imported annually from Russia.
In April, Descalzi secured approval from Algeria to increase the gas it exports via pipeline to Italy from 9bn to 15bn cubic metres a year in 2023 and 18bn in 2024. Two days later, Eni signed a deal to export 3bn cubic metres of liquefied natural gas from Egypt to Europe in 2022.
In the same month, it reached an agreement with the Republic of Congo to accelerate the development of a planned LNG project to provide 1bn cubic metres for export in 2023 and 4bn cubic metres by 2025.
Eni was able to access these opportunities as it had “invested a lot [in Africa] in a period where no one invested”, said Descalzi, adding that some rivals had chosen to invest in US shale gas instead, while Europe had allowed itself to become too dependent on Russian supply.
In November, Eni shipped the first cargo of LNG from Mozambique. The $7bn project — a partnership with ExxonMobil, CNPC, Galp and Korea Gas Corporation — is the first of several giant Mozambique gas projects planned since discoveries were made more than a decade ago.
Europe has exploited Africa’s resources for centuries, often paying royalties to export commodities while doing little to foster the development of local economies.
An effective south-north energy alliance would require a different attitude and approach, said Descalzi. For example, in 2021 about 85 per cent of the gas Eni produced in Africa was used to supply local markets, compared with 78 per cent worldwide.
“When you do something like that you take more risk . . . because it is much easier to export all of the gas you produce,” he said. “[But] we must be sure that we are creating value for them.”
Whether or not European companies and lenders should provide funds to develop new fossil fuel projects in developing regions such as Africa has become an increasingly fraught debate since world leaders signed the Paris climate agreement in 2015.
While environmental groups have lobbied companies, including Eni and France’s TotalEnergies, to halt new hydrocarbon projects in Africa, many African leaders argue they have a right to develop their national resources to drive economic growth and improve access to energy.
Even if Africa were to use all its known reserves of natural gas, the continent’s share of global emissions would only rise from 3 per cent to 3.5 per cent, Nigerian president Muhammadu Buhari wrote ahead of the COP27 climate meeting in Egypt in November.
Descalzi said that new oil and gas projects, if they can be developed quickly, could provide governments with a revenue stream that could be reinvested in clean energy projects.
Eni discovered oil off Ivory Coast in September 2021 and has fast-tracked development to start pumping in the first half of 2023.
The company said the emissions from the oilfield and the energy it uses — known as scope 1 and scope 2 emissions — would be offset with forestry and clean-cooking initiatives that would make it the first “net zero” hydrocarbons development in Africa. All of the associated gas in the field will be used locally for power generation.
“There has to be good cash flow for the country to develop a different energy mix during the transition,” said Descalzi.
In Kenya, where Eni is also exploring for oil and gas offshore, it opened a plant in July to process vegetable oil as a feedstock for its European biorefineries and sent the first shipment from the port of Mombasa in October.
Eni has two refineries in Italy producing biofuels and proposals for a third by 2025, by which time it plans to get 35 per cent of its biorefinery feedstock from agricultural hubs in Africa.
The production of feedstock crops such as castor, croton and brassica on “marginal land” that did not interfere with food crop production could become “the new upstream”, said Descalzi.
Eni is not the only European energy major diversifying its activities in Africa. BP has signed memorandums of understanding to explore the development of green hydrogen for export in Mauritania and Egypt.
TotalEnergies, which has one of the biggest portfolios of African oil and gas assets, is also running solar power projects in Egypt, Burkina Faso, Uganda and South Africa.
Almost half of Africa’s 1.4bn people lack access to electricity. The continent produces only 6 per cent of global fossil fuels from 4 per cent of global reserves, but has access to 39 per cent of global renewable energy potential, according to energy think-tank RMI.
The right investments, based on mutual “respect”, could help address energy security in Europe and energy access in Africa at the same time, said Descalzi. “Respect, what it means for me is that you have to take a risk with them together.”
Falling inflation unlikely to deter ECB from more rate rises
Slump in headline rates masks signs that underlying price pressures remain strong
Eurozone inflation almost certainly fell back into single digits for the first time in three months in December, with data published earlier this week showing price pressures eased by more than expected in Germany, France and Spain towards the end of 2022.
Yet the slowdown is unlikely to be enough to convince the European Central Bank to stop raising interest rates just yet, with markets still pricing in a series of increases by officials in Frankfurt over the course of 2023.
Franziska Palmas, senior Europe economist at research group Capital Economics, said: “The ECB is likely to stick to its hawkish rhetoric in the near term despite the big falls — and likelihood of further sharp declines this year.”
Why are the falls not enough to convince the ECB to change tack?
While falls in fuel prices and government subsidies to help businesses and households out with higher power bills have cut headline inflation rates, underlying price pressures remain strong.
Berlin paid most households’ gas bills for December, which Commerzbank economists estimated knocked 1.2 percentage points off the harmonised rate of headline inflation. The rate fell to 9.6 per cent, down from 11.3 per cent the previous month. But growth in the cost of services, an indicator of how long price pressures are likely to endure, accelerated in December.
In Spain, core CPI inflation — which excludes movements in the price of food and energy — rose in the year to December, despite a sharper than expected fall in the harmonised headline rate to 5.6 per cent.
Although headline inflation in the eurozone fell from the 10.6 per cent record hit in October to 10.1 per cent in November, core inflation — at 5 per cent — remained at an all-time high. It is expected to stay there in December.
“This year will be mostly about getting under the hood of inflation and seeing exactly what is driving it,” said Paul Hollingsworth, chief European economist at French bank BNP Paribas.
For the ECB to change tack, rate-setters will want to see a substantial fall in the core rate and other measures of longer-term inflationary pressures, such as wage growth. They will also be on the lookout for signs that governments’ support for households and businesses struggling with high energy prices is boosting demand.
Christine Lagarde said in an interview with Croatian newspaper Jutarnji List: “We need to be careful that the domestic causes [of inflation] that we are seeing, which are mainly related to fiscal measures and wage dynamics, do not lead to inflation becoming entrenched.”
What’s next for inflation in Europe?
Economists polled by Bloomberg forecast a drop in eurozone inflation to 9.5 per cent in December, down from 10.1 per cent in November. The data, published by the European Commission’s statistics bureau Eurostat, are out at 10am UK time on Friday morning.
Further falls are expected in the coming months, following the slump in energy prices since the start of the year. The impact of last year’s surge in power costs following Russia’s invasion of Ukraine will also soon fall out of the index, lowering the headline figure substantially.
Carsten Brzeski, head of macro research at Dutch bank ING, predicted that euro area inflation could even drop back to the ECB’s 2 per cent target by the end of 2023.
If the recent falls in gas prices continue, the ECB will almost certainly have to downgrade its inflation projections for this year. The central bank said in December that prices would rise 6.3 per cent over the course of 2023, based on assumption for natural gas prices to average €124 per megawatt hour over the whole of this year.
But the price of the Dutch TTF benchmark European gas contract has fallen about 10 per cent this week to just €69.70/MWh as of Thursday afternoon — a level 80 per cent below the August high of €340/MWh.
“The ECB’s own inflation projections are currently too high, just judging from the technical assumptions for gas and oil prices and where these prices are currently,” said Brzeski.
What does this outlook mean for interest rates?
Last year, the ECB responded to soaring inflation by raising interest rates at an unprecedented pace, lifting its deposit rate from minus 0.5 per cent in July to 2 per cent by the end of the year.
ECB president Christine Lagarde said in December that markets were underestimating how much higher borrowing costs would go, adding: “We should expect to raise interest rates at a 50-basis-point pace for a period of time.”
Since then, investors have been pricing in about 1.5 percentage points of rate rises over the opening three quarters of 2023.
Two half-point rate rises at officials’ next two policy meetings in February and March and a few smaller moves later in the year remain the expectation, despite the sharper than expected falls in inflation this week.
Without sharper falls in measures of underlying price pressures, markets’ and economists’ expectations for eurozone interest rates are unlikely to shift by much.
“It is all very well getting back to 3 or 4 per cent inflation,” Hollingsworth said. “But it could be harder to get down to 2 per cent, particularly if there is a milder than expected recession.”
He added: “We really need to see services prices and wage growth cooling to convince the ECB it has done enough.”